New formula for evaluating funds? The PEP Ratio.

WABAC

Sometimes I browse Advisor perspectives. Today I ran into this piece by Nir Kaissar of Bloomber News.

The writer starts off with a reminder of the good old days, when Peter Lynch could figure out the PEG ratio on the back of a napkin, add a few billion simoleans, and call it a day.

These days most people are invested in stock funds. So Kaisar suggests a new way to evaluate them:

My fair-use ration:

There’s an investment case for both groups — buying cheap stocks has been a winning strategy historically, and so has buying shares of highly profitable companies. Still, differences in valuation and profitability make stock funds difficult to compare. One way to solve that is with a variation of Lynch’s PEG ratio that substitutes profitability for growth. This PEP ratio, let’s call it, compares funds’ P/E ratio with their profitability, and like the PEG ratio, the lower the PEP ratio, the better.

Invesco tells me the P/E for SPGP is 15.21, and the ROE is 42.08 for a PEP ratio of .361. Given SPGP's thesis, the final number isn't too surprising.

Something called Market Chameleon (MC) tells me that TDV is at 21.39 P/E and ROE at 24.9, for a PEP of .85.

And SPY comes in at 23.72 and 17.9 for 1.325. If Kaissar is eating his own cooking, he's not buying the 500.

I don't recommend this as a way to pick and choose funds. But stuff like this amuses me the way baseballreference.com's player similarity scores do--not to mention WAR.

carew388

+1

Observant1

Interesting article.
Thanks for sharing!

WABAC

de nada.

I find it interesting to play with as I evaluate the holdings in our over-stuffed IRA's, what to add to on a dip, or looking at funds in the same category.

FD1000

The problem with VALUATION is the fact that:

1) It can't predict the next 3-6-12 months

2) It can't predict market correction and which index/category will go down more.

3) Once upon a time PE10(CAPE) looked like a decent indicator until it failed miserably.
Prof Shiller created PE10 which is supposed to predict performance based on valuation better than PE
On 05/2012 (https://money.cnn.com/2012/04/10/pf/investing-Shiller.moneymag/index.htm)
Question: You have become famous for your cyclically adjusted 10-year price/earnings ratio. What do the latest numbers say about future stock market returns?
Shiller: we found a correlation between that ratio and the next 10 years' return.
If you plug in today's P/E of about 22, it would be predicting something like an annualized 4% return after inflation.
FD: In reality, the SP500 made 13.6% in the next 10 years (04/31/2012-04/31/2022). Let's deduct the inflation and make it 11%. It is much better than countries with lower PE10 such as Emerging markets.

4) If valuation or another indicator has been how you make more money, we would have a lot more investors such as Buffett and Lynch. Times have changed too...article quote:"It’s harder to find overlooked stocks than it was in Lynch’s day because more people are looking for them — anyone with a smartphone has free access to extensive markets and financial information. The result of greater competition is evident in the numbers: Fast-growing or highly profitable companies are almost always the most expensive while the cheapest ones come with lackluster growth or thin profits."

WABAC

FD1000 said:

The problem with VALUATION

When people start shouting, I stop reading.

Dinky linky.

Professor Paul Luna, director of the department of typography and graphic communication at the UK’s University of Reading, told me we’ve been using caps to convey “grandeur,” “pomposity,” or “aesthetic seriousness” for thousands of years—at least since Roman emperors had monuments inscribed, in all caps, with their own heroic accomplishments. . . .

“All-capitals provide visibility—maximum size within a given area,” said Luna. And that works online, too. “All-caps in an email looks like shouting because when someone is shouting, you’re aware of the shout, and not the nuance,” Luna told me over email. “ALL-CAPS FILL THE SPACE, so there’s an element of feeling that the message is crowding out everything else.”

FD1000

WABC, The problem with your post....This site isn't an email forum, it's an investment discussion online forum. Valuation was the only all-caps word and the most important one. Obviously, you paid attention.

BTW, it's about time to look at the context and stop looking for controversy.

Old_Joe

@FD1000- if you don't mind a suggestion, a good alternative to all CAPS is simply to use the "Bold" or "Italic" formatting options. Just select the word that you want to emphasize, and use the "B" or the "I", or even both. Like so:

Valuation    Italic
Valuation    Bold
Valuation    Bold & Italic

carew388

+1

FD1000

I use all 3, bold, italic, all caps for several words.

Back to the subject. I have read annually for years that EM stocks have a better value than US stocks...and it didn't seem to matter.
In fact, at the end of 2022 many analysts and managers told us that Tech is overvalued and to buy Value stocks....and QQQ made YTD already over 42% and Value is way behind.
Years ago on this board several claimed that Apple is another blue chip, it wasn't.
Bottom line, valuation can be "irrational" for years.

yogibearbull

CAPITALIZATION vs Bold

All CAPS are screaming. That would be bad as would be all bold.

But selected CAPITALIZATIONS often substitute for bold at many discussion forums.

Many sites don't have bold (Facebook, Twitter, etc). Some that have it don't support it on copy-and-paste (including MFO, ProBoards, etc). This is an issue for those who compose long posts on WORD and then paste it - much of the formatting is lost, bold, italics, color (none anyway at MFO, M*), tabs, spacing, etc. It is too cumbersome to reformat everything after copy-and-paste.

BTW, MFO isn't user-friendly for tabular materials; often, the URLs have to be reposted/redone; as noted above, colors aren't supported; attachments cannot be included.

Anyway, selected CAPITALIZATION for bold is a typical practice that I also follow.

BenWP

I have been tempted to invest in areas or funds based on valuation analyses, usually to my detriment. EM is the most obvious example. One factor mentioned above is that information is now available to all the market players, as opposed to just the analysts or fund managers. I would add the reduction in the number of stocks available for investment as another factor that has diminished the chances of finding “undervalued” stocks. I am just as impatient as the next guy, and the two of us look at “value” funds and say, “What have you done for me lately?” I believe the next guy and I have too much information at our finger tips, as well as having the ability to sell on a whim. @FD1000 is right about valuation metrics showing a marked inability to predict the direction of the market. Stocks the “should” go up or go down have a marked propensity for acting like teenagers.

racqueteer

Well, if nothing else, I've learned that my propensity for using all caps as an indication of vocal emphasis (note: NOT shouting), is better replaced by employing bold instead. So noted...

msf

BTW, MFO isn't user-friendly for tabular materials; often, the URLs have to be reposted/redone; as noted above, colors aren't supported

To preserve spacing, for tabular materials or other text, you can tell the browser that the material is preformatted so that it doesn't try to reformat (generally compress all whitespace to a single blank). Put <PRE> before the text and </PRE> after it.

For example, here's CNBC's table of MFJ tax brackets for 2023:

$22,000 or less	10% of the taxable income
$22,001 to $89,450	$2,200 plus 12% of amount over $22,000
$89,451 to $190,750	$10,294 plus 22% of amount over $89,450
$190,751 to $364,200	$32,580 plus 24% of amount over $190,750
$364,201 to $462,500	$74,208 plus 32% of amount over $364,200
$462,501 to $693,750	$105,664 plus 35% of amount over $462,500
$693,751 or more	$186,601.50 plus 37% of amount over $693,750

This isn't perfect (see first line) because preserving tabs is sometimes not enough to completely reproduce the spacing. Adding a second tab in the first line fixes that.

$22,000 or less		10% of the taxable income

URLs are problematic when they include embedded whitespace. For example, http://www.example.com/my beautiful page

doesn't work because it looks like the URL ends with "my". This is fixed by using the link icon and inserting the URL in the dialog box. No redoing of the URL (i.e. replacing the blanks with '%20's) is needed.

http://www.example.com/my beautiful page

Color is certainly supported by MFO, but it has to be handled manually.

@Old_Joe provided an excellent example of how to do colors and tables with HTML tags for colors (as I did, above) and explicit blanks (&nbsp;) for precise spacing. Here's his post: https://mutualfundobserver.com/discuss/discussion/comment/167577/#Comment_167577

To see how he worked this magic, see here:
https://mutualfundobserver.com/discuss/post/quote/61469/Comment_167577

Based on his encoding of blue as 0x0000FF rather than "blue" (which is what I used), I would guess that he used a tool to process the table he was transcribing.

MFO certainly isn't user-friendly when it comes to these sorts of formatting, but posting with things like color are not impossible.

WABAC

FD1000 said:

WABC, The problem with your post....This site isn't an email forum, it's an investment discussion online forum. Valuation was the only all-caps word and the most important one. Obviously, you paid attention.

BTW, it's about time to look at the context and stop looking for controversy.

No controversy FD99.

If you think tarting up the typeface makes your posts more, something, knock yourself out.

Where you may see “aesthetic seriousness,” readers might see "pomposity" or overwrought "grandeur" a little too much for an informal place like a forum. They might see something else entirely, like shouting to grab attention. Reader's opinions will be colored by their familiarity with the writer's previous posts.

You say, without typographical histrionics:

I have read annually for years that EM stocks have a better value than US stocks...and it didn't seem to matter.
In fact, at the end of 2022 many analysts and managers told us that Tech is overvalued and to buy Value stocks....and QQQ made YTD already over 42% and Value is way behind.
Years ago on this board several claimed that Apple is another blue chip, it wasn't.
Bottom line, valuation can be "irrational" for years.

What do you think you have proved?

Do you buy things without bothering to estimate, and consider, the value of them? That value does not predict the future? Nothing does. Not charts. Not momentum. Not even the Magic 8-Ball or Ouija Board.

FD1000

WABAC, several posters supported my opinion about all-caps, you can too.

What do I do? I can write a lot about it and did in the past, but not anymore. Believe it or not, it works pretty well. It's mostly at (https://fd1000.freeforums.net/thread/25/putting-all)

WABAC

FD1000 said:

WABAC, several posters supported my opinion about all-caps, you can too.

What do I do? I can write a lot about it and did in the past, but not anymore. Believe it or not, it works pretty well. It's mostly at (https://fd1000.freeforums.net/thread/25/putting-all)

HUCKSTER.

FD1000

Well WABAC, your intentions are out. You started a thread and posted a link. I stayed on topic and stated my opinion while you have been off the subject in your last several posts, and called me names. Very predictable.

WABAC

Your only intention is to drive traffic to your website and your proprietary trading scheme.

FD1000

I don't think so. I don't promote my system and I never made a dime from my site. It is a free place for anyone. YBB also has a site hosted by the same place.
I use my site for many of my investments ideas, from generic subjects and all the way to specifics. Have a nice day.

WABAC

YBB does not push his very own market-timing schemes.

Nor does he denigrate factors that aren't meant to predict the market in an effort to convince people that his schemes can time the market. Consequently, YBB does not have to post disclaimers if people lose money practicing his scheme:

Just like anything else practice makes you better.

Lost money following your scheme? More practice.

Maybe you aren't a duck. But you sure do quack with the flock.

kevindow

Anybody who attempts to discredit any person/concept by attacking grammar, punctuation or caps/bolds without providing a logical rebuttal to the subject material, has objectively lost the dialectic.

racqueteer

WOW, Keven; nice to see you post! Must have been a really (see, I can learn) annoying post to flush you out! Agree with the sentiment.